Piped lament

Date: 15/11/03

Scotland's bloated public sector crowds out growth. Where's the axe?

AN UNEXPECTED ray of economic sunshine broke across Scotland on November 10th with a survey showing the orderbooks of local business swelling faster than at any time in the past three years. It seemed like great news for the hard-pressed political hacks who run Scotland's devolved assembly. Since the creation of the Scottish Parliament in 1999, a near stagnant economy has dashed once rosy expectations of prosperity. But actually, the news is not that good, and it increasingly looks as if local politicians are the problem, not the solution.

The survey, a purchasing managers' index published by the Royal Bank of Scotland, showed that the current upturn, caused mainly by the American economy picking up, is actually bigger everywhere else in Britain. So Scotland, where the economy has grown by only 14.5% since 1995 compared with 23% in Britain, is still lagging behind.

Why? One reason is that manufacturing (especially electronics) and farming have been hurt especially badly in the past few years. They are bigger parts of the Scottish than the British economy as a whole. But given the national reputation for canniness, drive and thrift, Scots still ought to be doing a lot better.

In fact, much of this reputation has been earned abroad rather than at home. A recent book* by Tom Devine, professor of Irish and Scottish Studies at Aberdeen University, has shown that even in boom times, Scots emigrated in droves in search of better opportunities abroad. Many founded or ran great commercial empires, such as Jardine Matheson in Hong Kong. They still want to go. A recent MORI poll found that a third of 17-25-year-olds would emigrate given the chance.

The problems of the enterprising leavers and the slow-growing stay-behinds has caused much head-scratching. Strathclyde University has invited some of the world's leading economists to suggest solutions. One, William Baumol, a professor at New York University, argued that the “availability of lucrative positions in the governmental bureaucracy serves to attract away many individuals with entrepreneurial talent from roles that could contribute to the economy's production.”

He has a point. Public spending in Scotland consistently consumes getting on for 10% more of the Scottish economy than in Britain generally and is fast approaching 50% of GDP. It does seem to be crowding out private activity - public sector employment is 27% of all Scottish jobs, but 24% of all British jobs. Donald MacRae, chief economist at Lloyds TSB, a bank, reckons that this reduces the incentive for private business. The business birth rate in 2002, at 28 per 10,000 Scots, is way below the British rate of 37 per 10,000, and self-employment is similarly low.

Yet few politicians favour the obvious remedy. Only the Conservatives, a minority in the Scottish Parliament, advocate privatisation and the contracting-out of public services. They would be even more unelectable if they dared to promise cuts in public spending.

*“Scotland's Empire, 1600-1815”. By T. M. Devine. Allen Lane, £25.

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